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SME Management


Fall 2012


GDB no.02


Marks: 20 marks

Opening date: November 7, 2012

Closing date: November 8, 2012


Topic: Route to start a business

Lessons: 1 -7



Objective of the activity

The prime objective of this activity is to make the students learn about the different routes available to start a business and risks especially associated with family business.


Learning outcome:


After this activity students will be able to:

  1. Comprehend the different route to start a business
  2. Comprehend the risk associated with entering into family business. It might change the perception related to family business preferences.  





Are you ready for a starting your own business? If the answer is Yes, then the next step is to find the most suitable route to start your own business. As mentioned in many text books, there are four possible routes to start your own business which are mentioned below:


  1. Establish your own business
  2. Buy a running business
  3. Buy a franchised business
  4. Enter into a family business


It’s a common perception that establishing own business or buying a running business involve more risk as compared to buying a franchised business or entering into a family business. Similarly, within franchised business and family business, entering a family business is considered as an easy and less risky route. To certain extent this perception is endorsed with advantages associated with family business. For instance, the already established business does not require to build the infrastructure of the business, field is already set, all resources including men, machines, money and martial are already in motion and family support and family guidance is an additional advantage in the initial days of  business. It seems an ideal situation for young entrepreneurs but there could be some possible problems associated with family business.



Point of discussion


Let us assume that you are sitting in a friend’s meeting where everyone is motivating you to join family business where as you do not want to join family business for certain reasons. What possible points you will discuss with your friends to convey all the possible risks associated with entering into a family business?


Note: give at least 10 arguments in the favor of your answer ( 2 marks for each argument).



Students’ Guide


  1. You are required to read the handouts and relevant material (if available) before attempting this discussion.
  2. Stay within the POD and do not add irrelevant or obnoxious material.
  3. It is strictly prohibited to reproduce or copy/paste any readily available material available on internet.
  4. Be careful from those blogs who are promoting cheating culture among our students and killing their creativity and critical thinking. Answers copied from such blogs will be straightaway marked as ZERO. Similarly any relevant or irrelevant material copied from internet sources will get the same treatment. It can seriously damage your grades.
  5. It is an opinion based discussion. Any identical answer will not be treated as coincidental and will be straightaway marked as zero. It can seriously damage your grades.
  6. There is no grace period in case of GDB.



Note related to load shedding and meeting deadlines: Please be proactive


Dear students!


As you know that semester activities have started and load shedding problem is also prevailing in our country now a days. Keeping in view the fact, It is requested to all of you to manage to post your activities as early as possible and don’t wait for the due date. For your convenience activity schedule has already been uploaded on VULMS for the current semester, therefore no excuse will be entertained after due date of assignments, quizzes or GDBs. 

Good luck and have a happy learning


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Bronfenbrenner Life Course Center

Management Succession Issues in Family Business

by Bernard L. Erven, Professor and Extension Specialist
Department of Agricultural Economics, Ohio State University

Each family with a business faces the reality that the business will eventually end or have new managers. This reality is independent of the founding and previous managers' successes in building the business and their current success and stature in the community. This paper focuses on key issues involved in facing this reality of management succession. In particular, the focus is set in the context of assistance to family business managers by extension specialists in the human ecology and agricultural sciences.

The human ecology and agricultural sciences have a rich history in teaching, research and extension designed to assist family businesses. Family has often been separated from business in this work. Serious attention to assisting family businesses with their succession planning and implementation requires that the family and business be fully integrated in analysis and programming. The "building bridges" theme of this conference is consistent with the practical problems of most concern in management succession in family businesses.

The paper first addresses the family business environment within which succession problems are addressed. Business management succession is then addressed in terms of: the role of the founder, the perspective of the next generation, succession as a process and the characterization of effective successions. A set of old and new family business paradigms is then proposed. The paper concludes with identification of fourteen research questions which have the potential of enhancing the cooperative work of the human ecology and agricultural sciences in management succession.

The Family Business Environment

Family business is defined in terms of ownership, authority and responsibility. Majority ownership of a family business is by one or more family members who have the authority and responsibility for its day to day management as well as its mission and strategies. The management team may include some people unrelated to the family business managers. Employees may be family and/or non-family. The terms founder and senior manager, used interchangeably, refer to the top manager in the current generation of the business. The business may or may not be in its first generation.

Family businesses have characteristics contributing directly to the difficulty of transferring management to the next generation. Of particular interest are the characteristics which distinguish the management succession issues of family businesses from those of non-family businesses. Most of these characteristics are related to human interactions among family members and their inability to isolate family issues from business issues.

Family businesses mix business and family. For example, family social occasions can involve more business talk than family talk. Tranquility in a family that is in business together requires acceptance of the double lives everybody is living. (Fritz, p. 46) vustudents.ning Family problems and decisions are mixed with business problems and decisions. Solutions to problems are rarely pure business or pure family in nature so attempts at complete separation are counterproductive.

Family businesses may not provide opportunities that fit all family members' strengths. The current generation but more importantly the next generation may have strengths not applicable to the business. To illustrate, two children of the founder have limited mechanical, financial management and marketing skills and interests - the very keys to success in the next generation of the business. They do have outstanding finish carpentry and trombone skills. However, these skills fail to provide a strong pool of talent for facing the next generation's problems.

Family businesses typically provide limited career growth opportunities for family members and employees given the small number of top managers and only one to three levels of management. So even a highly motivated and talented 35 year old may have a twenty year wait for a promotion.

Health, marriage, weather and economic calamities can impede even the strongest family businesses. Risk sharing strategies can only provide some of the needed protection.

Business continuity requires generation to generation transition. Timeliness in the transition is essential. However, the parents may be unwilling to give up control and authority at the time the next generation wants it or should have it. On the other hand, the next generation may not be ready for their responsibilities when they have to assume them.

Finally, continuous change in the external and internal environments accompany business management succession. The changes are diverse and pervasive: technology, public policies and regulations, growth and aging of people, and economic opportunities. Change must be managed simultaneously with attention to management succession.

Business Management Succession

The importance of management succession planning and implementation creates many opportunities for research and extension in the human ecology and agricultural sciences. An adaptation of the categories used by Handler (1994) to summarize family business succession research provides a convenient framework to reflect on issues facing integration of work by the human ecology and agricultural sciences: the role of the founder, the perspective of the next generation, succession as a process, and the characterization of effective successions. In the following discussion, there is an implicit assumption that top managers lead a strategic planning process which incorporates management succession and long-run continuation of the business. The strategic planning includes development of mission, goals, objectives and tactics for the business.

The Role of the Founder

The founder as the most influential person in the organization sets the tone for management succession, makes the "rules" and more than anyone else determines success or failure of the succession. This paper opened with a reality. Each family business will eventually have a different generation of managers or it will no longer exist. The founder's acceptance of this reality undergirds and fosters management succession planning. Rejection of this reality stifles the planning.

If the founder does not have a viable business that gives the next generation a chance at success, the issue is transfer of assets to the next generation rather than transfer of management. Understanding and communicating the current status of the business is a primary role for the founder.

Ideally, the founder integrates management succession concerns into strategic planning. The founder has the responsibility of involving all members of the management team in strategic planning. The founder must also deal with the integration of plans for the business and plans for the family because "family issues ultimately shape the business strategy." (Ward, p. 161) Updating the mission statement causes the management team to continuously answer the question, Why are we in business? This question can easily be expanded to deal with questions of business and family values, human resources including employees, role in the community and industry, and long-run aspirations. Answering these questions requires careful communication within the family business. Improvement of communication skills may need to precede strategic planning. A family commitment rather than just a founder commitment to improved communication increases the chances of success. (Robinson)

In the absence of strategic planning and written mission statements, each member of the management team is allowed to generate her or his own reasons for being in business. Conflicting strategies for success, misallocation of resources and failure to deal with management succession then characterize the business. The founder's top management role is thus compromised on critical strategy decisions.

Several states now have management training programs patterned after Cornell's PRO-DAIRY program. (Young) Attention to value clarification and writing mission statements is an important part of these programs. Founders managing farm businesses can avail themselves of this management training and also take advantage of farm business succession planning materials available in some states. (Polson) Unfortunately, few agricultural economists are working closely with specialists in the human ecology sciences in planning and conducting these programs.

The Perspective of the Next Generation

The next generation's perspective may at first appear to be little more than the flip side of the founder's perspective. In fact, the next generation has multiple perspectives owing to its composition: sons and daughters who enter the business,vustudents.ning their siblings who do not enter the business, the spouses of the founder's children and the founder's employees. For each of these four groups, there are issues of career and financial planning, career opportunity and career satisfaction, fairness of treatment by the founder, and family relations.

Regardless of how the founder may have conducted the affairs of the business, the next generation of managers in agriculture faces the certainty that success of a business is dependent on more than hard work, sacrifice and adoption of new technology. As Rogers argues from the perspective of a financial lender and management consultant, "the era of management focus has finally arrived in agriculture." (Rogers, p. 24) The next generation's success after gaining management control depends on a complex milieu of financial, management, interpersonal and external factors. Assuming that management control over the founder's resources and personnel assures success may instead leave the next generation poised for failure. Maintaining the business at the founder's level challenges the new manager. However, matching the founder's level of operation and expertise probably will be inadequate. A business can not stand still and have long-run success. Changing and growing the business to have a chance at long-run survival is a challenge the new management team may not be able to handle. Competition, inflation, shrinking profit margins, changing technology, and new customers with changing expectations will challenge even the best managers.

More than the capacity to manage the business affects the next generation. Handler (1992) identified the following factors as impacting on the next generation: personal need fulfillment, career interests, personal identity, life stage, personal influence, mutual respect and understanding between generations, sibling accommodation, commitment to family business perpetuation and separation strains due to family involvement.

The mix of management, financial, family and psychological factors affecting the next generation generates need for expertise beyond that occurring in the typical family business. The next generation can be helped greatly by a diverse external advisory committee as well as individual consultants. The narrowness of consultation from a single perspective, e.g., financial planning, estate planning, family relations or business growth is likely to generate a false sense of security in the next generation.

Succession as a Process

Management succession can be a process taking place over many years requiring cooperation of all people on the management team. The succession steps involve planning, selection and preparation of the next generation of managers, transition in management responsibility, gradual decrease in the role of previous managers and finally discontinuation of any input by previous managers.

In contrast to the above process, management succession can be by crisis. The crisis may be brought about by the death or disability of the founder, divorce, threat of departure by the heir apparent, or hiring of an outside manager in an attempt to "finally fix things gone wrong." In the absence of design and implementation of a process, succession will almost certainly be by crisis. Preferably, management succession is a process not motivated by crisis nor characterized by a single event nor marked by a single date on the calendar.

Whether succession is a process or a crisis depends on several characteristics of the business, senior managers and family. Growing, profitable and successful businesses cause managers to think about expanding opportunities and continuity. Stagnant businesses with disappointing profits cause managers to concentrate on today's predicaments. An attitude of, "I've got to solve today's problems before I can worry about the future." makes treating succession as a process difficult if not impossible.

Senior managers garnering the payoff from strategic planning are more likely to see the benefits of succession planning than managers who muddle along day to day. The knowledge and self-discipline to do strategic planning, expansion planning, human resource planning, financial planning and market planning, for example, certainly can extend to succession planning. Optimistic, systematic and business oriented managers are more likely to plan for and follow through on management succession than pessimistic, unsystematic and production oriented managers.

Family characteristics also influence whether management succession will be a process or a crisis. As the number of adult children and their children in the business increases, the complexity of management succession increases. Similarly, difficulty in management succession is likely to increase with an increase in the number of heirs expecting cash from their parents' estates. Tightly knit families with strong commitment to honoring their parents' wishes about business continuity should face fewer problems than fragmented contentious families.

For management succession to be a process rather than a crisis, the family business must deal with a wide range of problems. Integration of expertise from the human ecology sciences and agricultural sciences offers great synergistic potential.

The Characterization of Effective successions

The empirical data and anecdotal evidence are overwhelming on failure in the second and third generations of family business that were successful in the first generation. Buchholz and Crane report that 30 percent of family businesses in this country survive to the second generation and only half of these first generation survivors make it to the third generation. (Buchholz, p. 15) An obvious challenge to family business extension programs in human ecology and agricultural sciences is to alert family businesses to the keys for continued operation.

Handler (1994) reviewed the literature on effective successions. She wanted to answer the question, What characterizes them? Not surprisingly, she reported characteristics of effective successions from a diverse set of research reports rather than a conclusive set of guidelines for success. Following are five actions for management succession success consolidated from her list of more than 15 factors extracted from the research literature on management succession:

1. Select managers for the next generation. A person can rarely be successful in declaring himself or herself the new manager.

2. Put in place a comprehensive development program for these managers. There needs to be some combination of formal training, self-study, mentoring, communication, performance evaluation, strategizing about overcoming specific weaknesses and employment outside the family business. Manager development comes through an active process rather than simple assimilation through watching "mom and dad do it for years."3. Provide opportunities for next-generation managers to fulfill their personal and career goals. Delegation of specific responsibilities and the necessary authority is also important.4. Develop plans for management succession, strategies for the continued operation of the business, retirement of the current managers and transfer of assets before and through the estate. Base plans on realistic assessments of the past and present, and reasonable expectations for the future. The plans need to stay flexible while providing for timing of the transfer, responsibilities of family members during and after the management succession, the specific arrangements for a testing period and financial security of current owners. As mentioned previously, the plan is for a process not a single transfer event.

5. Develop positive associations and good working relations among the family members in all generations in and out of the family business. Strained relations makes the inevitable need for compromise difficult if not impossible. As a practical matter, family business managers are unlikely to use a long check list to guide their actions. Identifying key actions which affect the management succession process can be a helpful starting point in developing a strategy for management succession that is responsive to the specifics of the case. The succession strategy will be evolutionary as changes occur in family members and employees, the culture of the business and the external business environment. Moreover, at any point, a health, marriage, weather or economic calamity may divert the best planned strategy for succession.Management Succession Paradigms

The issues and implications presented in the previous section will have little impact on researchers and extension educators constrained by obsolete paradigms about management succession and family businesses. As a means of summarizing key points for the human ecology and agricultural sciences, old and new paradigms about management succession are suggested. The new paradigms should be especially useful to those designing extension programs for family businesses. They are general statements and thus can not capture all the germane points about management succession in family businesses. The paradigms labeled as "new" are designed to have relevance for both human ecology and agricultural sciences rather than having a separatist family or business orientation. The paradigms labeled "old" are designed to summarize the more traditional views of management succession which have dominated the islands of programming in management succession in human ecology and agricultural sciences.

New: Some families will decide, for good and justifiable reasons, to liquidate their successful businesses rather than pass them to the next generation.

Old: Managers of successful family businesses oppose liquidation in their life imes and believe they owe the next generation the opportunity to continue heir businesses.

New: In management succession, family and business concerns are overlapping and inseparable.

Old: In management succession, the business concerns dominate and family matters are secondary and separate.

New: Specialists in human ecology and specialists in agricultural sciences each have the potential for contributing to improvement of quality of family life and quality of business management.

Old: Quality of family life and parenting are the domain of human ecology specialists; business management and production technology are the domain of the agricultural sciences; separation increases the contribution of each group of specialists.

New: Mission and goals for the family business continuously address management succession.

Old: Management succession, retirement planning and estate planning are relevant issues only at the end of the founder's career.

New: Planning of management succession encompasses the extended family.

Old: Planning of management succession concerns only the people directly involved in ownership and operation of the business.

New: Successful management succession does not guarantee the long-run viability of a founder's thriving family business.

Old: A family business thriving in this generation depends primarily on management succession to be successful in the next generation.

New: Employment outside the family business may provide essential perspective, maturity and experience necessary for success in the family business.

Old: Haste in joining the family business is essential because the opportunity may be lost.

New: Joining the family business as an employee in a non-management capacity with a formal job description and regular performance evaluations provides a beneficial testing period both for the family and the family member employee.

Old: Family members come into the business as managers and co-owners so that they have an immediate sense of responsibility, importance and commitment.

Research Questions

Additional research would greatly benefit extension programs in business management succession. The following list of researchable questions stems from the author's work with farm families involved in management succession. However, many if not all of the research issues are likely to be relevant for non-farm family businesses.

1. How can management succession concerns be integrated on a continuous basis into strategic planning and in particular into mission statements? In strategic planning, the typical implicit premise is that the current generation of managers will continue indefinitely.

2. In what order should tangible business assets be transferred to the next generation? In liquidation of a business, transfer of assets to the next generation is relatively easy. Sale and division of the resulting cash provides a fall-back strategy. Continued operation of the business while assets are being transferred lacks an easy fall-back position. For farm businesses, the order of transfer can be by type of tangible property: breeding livestock; inventories of grain, hay and feed; machinery and equipment; and land and buildings. A concern with the order in which assets are transferred suggests that management succession ought to be an orderly process to minimize disruption of the business rather than a single crisis event. Further, tax planning should be an integral part of the asset transfer planning.

3. What intangible transfers need to be explicitly included in the succession planning? The list of important intangibles is long: responsibility and authority, goodwill, organizational "memory," leases, informal agreements, chairing of staff meetings, representation of the business at community functions, check writing authority, and employee hiring and compensation authority. The handling of these intangible transfers sends important signals about power, identification and acceptance of the next generation of managers and unresolved succession problems.

4. How much income does the founder require to maintain the expected level of retirement living? Can the business support the retired founder, meet the expected family living expenses of the next generation and still have the necessary operating and investment capital for the business? Some family businesses simply are not sufficiently profitable to meet all the financial obligations.

5. What is the role of investments outside the family business and life insurance in facilitating transfer of the businesses to the next generation? The "unified credit" provided for in federal tax law allows each person to transfer $600,000 free of federal tax by gift before death or through an estate. However, some businesses have assets greater than $600,000 that lead to estate taxes that can be devastating especially to businesses already financially stressed. There are also state taxes, immediate cash payments to other heirs, and the founder's early death that can leave the next generation unprepared for its financial obligations.

6. How does size of business in terms of assets, equity, number of people in the management team, and number of employees affect management succession success? Larger businesses tend to be more complex and formal than small businesses. Thus, some informal management succession practices that work for small family businesses may be inappropriate for large family businesses.

7. How do outside careers of family members, especially in-laws, enhance and/or impede management succession? Use of outside earnings, competition for time, degree of involvement in the family business and outside career planning obviously impact management succession. Less obvious are issues of self-esteem of the person who has outside employment, sharing of parenting responsibilities, family members acceptance of in-laws' lack of interest in the business and the disruption of outside careers by seasonal pressures and catastrophes in the family business.

8. How do family values, importance placed on parenting, and roles and importance of the extended family impact management succession? Family businesses challenge managers. Family responsibilities require time and commitment. A host of issues provide the continuing potential for conflict: family versus business goals, excellence in parenting versus excellence in business management, family living expenditures versus business expenditures, and family employees versus non-family employees.

9. How do outside boards of advisors enhance and/or impede management succession? What roles can these boards play that are particularly helpful to the succession process? In particular, what are the necessary abilities of board members to play critical roles in such activities as initiating the planning process, resolving conflict among family members, and asking the "tough" questions insiders dare not or will not ask? What is the composition of successful boards in terms of size, experience, previous or current contact with the family and business, inside or outside the local community, and family business experience?10. Which communication techniques work best in making the non-management family members part of what is happening in the business? Regular and effective communication is essential to understanding of the succession plans. Informal and occasional communication can create more confusion than understanding. Communication techniques to be considered include: regular family meetings with agendas and minutes, regular tours of the business, financial summaries provided to all family members, detailed explanation of estate and retirement plans and annual written reports by management to all family members on progress of the business.

11. Under what circumstances does experience outside the family business facilitate a family member's joining the business? Is there some minimum number of years of experience that is helpful and some maximum number of years before the family member is too removed from the family and business to become a successful top manager in the business?

12. How do estate taxes and payments to family heirs not in the business impact management succession? Even the financially strongest family business can be devastated by taxes and required payments to family heirs outside the business. The legal, tax and business organization questions need to be handled with the assistance of experts who see the long-run financial implications of the succession plans as well as the operational and emotional implications.

13. Which personality types of the founder and next generation facilitate development of the necessary working relations between the two generations? Which personality types are most likely to lead to unresolvable conflicts? Identifying personality types early in the management succession process and then dealing directly with the implications should be helpful to developing the necessary working relations between the two generations.

14. What are key indicators that can be used to determine the role, perhaps necessity, of non-family members on the management team? These indicators may include business performance measures; knowledge, skills and abilities of the current managers; potential for management responsibilities among the next generation of family members; and confidence in the current and future management team by lenders, landlords and other business partners

this may help

20 challenges faced by a family owned business

17 08 2006

Every business organization has a unique set of challenges and problems. The family business is no different. Many of these problems exist in corporate business environments, but can be exaggerated in a family business.

Family business go through various stages of growth and development over time. Many of these challenges will be found once the second and subsequent generations enter the business.

A famous saying about family owned business in Mexico is “Father, founder of the company, son rich, and grandson poor” (Padre noble, hijo rico, nieto pobre). The founder works and builds a business, the son takes it over and is poorly prepared to manage and make it grow but enjoys the wealth, and the grandson inherits a dead business and and empty bank account.

Prepare now and help your grandson avoid the poorhouse.

20 challenges for the family business

  1. Emotions. Family problems will affect the business. Divorce, separations, health or financial problems also create difficult political situations for the family members.
  2. Informality. Absence of clear policies and business norms for family members
  3. Tunnel vision. Lack of outside opinions and diversity on how to operate the business.
  4. Lack of written strategy. No documented plan or long term planning.
  5. Compensation problems for family members. Dividends, salaries, benefits and compensation for non-participating family members are not clearly defined and justified.
  6. Role confusion. Roles and responsibilities must be clearly defined.
  7. Lack of talent. Hiring family members who are not qualified or lack the skills and abilities for the organization. Inability to fire them when it is clear they are not working out.
  8. High turnover of non-family members.vustudents.ning When employees feel that the family “mafia” will always advance over outsiders and when employees realize that management is incompetent.
  9. Succession Planning. Most family organizations do not have a plan for handing the power to the next generation, leading to great political conflicts and divisions.
  10. Retirement and estate planning. Long term planning to cover the necessities and realities of older members when they leave the company.
  11. Training. There should be a specific training program when you integrate family members into the company. This should provide specific information that related to the goals, expectations and obligations of the position.
  12. Paternalistic. Control is centralized and influenced by tradition instead of good management practices.
  13. Overly Conservative. Older family members try to preserve the status quo and resist change. Especially resistance to ideas and change proposed by the younger generation.
  14. Communication problems. Provoked by role confusion, emotions (envy, fear, anger), political divisions or other relationship problems.
  15. Systematic thinking. Decisions are made day-to-day in response to problems. No long-term planning or strategic planning.
  16. Exit strategy. No clear plan on how to sell, close or walk away from the business.
  17. Business valuation. No knowledge of the worth of the business, and the factors that make it valuable or decrease its value.
  18. Growth. Problems due to lack of capital and new investment or resistance to re-investment in the business.
  19. Vision. Each family member has a different vision of the business and different goals.
  20. Control of operations. Difficult to control other members of the family. Lack of participation in the day-to-day work and supervision required.


The interests of a family member may not be aligned with the interest of the business. For example, if a family member wants to be president but is not as competent as a non-family member, the personal interest of the family member and the well being of the business may be in conflict.

Or, the interests of the entire family may not be balanced with the interests of their business. For example, if a family needs its business to distribute funds for living expenses and retirement but the business requires those to stay competitive, the interests of the entire family and the business are not aligned.

Finally, the interest of one family member may not be aligned with another family member. For example, a family member who is an owner may want to sell the business to maximize their return, but a family member who is an owner and also a manager may want to keep the company because it represents their career and they want their children to have the opportunity to work in the company.

10 Key Family Business Issues

Family business can be incredibly rewarding, as it often can allow you to make a good living for your family, while at the same time getting to share the sense of accomplishment as you grow the business together and pass it on from generation to generation.  Family business can also have its challenges.  The vast majority of such businesses don’t make it past the first or second generation.  There’s a wide variety of reasons why this is the case.  Here we will touch on ten key issues that family businesses often encounter and should do their best to address proactively, before they turn into acute problems.

1.       Lack of Family Mission Statement Connection to Strategic/Tactical Plans

In order to have the Strategic Plan connected to the Family Mission Statement, of course, these two documents first must exist.  While it is true that in many cases, families have not gone through the time and effort to formulate a Family Mission Statement and a Strategic Plan, often times, even when this effort has been expended there is little or no connection between the two.  This can lead to a Strategic (and ultimately, Tactical) Plan that is not completely consistent with or worse yet, highly contradictory of, the written or unwritten Mission Statement of the family.  In other words, the family may be on a completely different page than the Board, who may be on a completely different page than the management team.  When the Board and management team include non-family members, this disconnect may be accentuated further and can lead to a great deal of conflict and ultimately sub-par performance or even failure of the family enterprise.  Thus, it is critical that these documents are well-aligned.

2.       Lack of Well Trained and Qualified Future Leaders

One of the main criticisms family businesses face is that the last name of prospective and current employees often matters more than their ability, training and experience.  This can lead to resentment that undermines the ability of the enterprise to reach its potential.  This situation can be avoided by developing and adhering to paths and policies for employee advancement within the company.  In many family businesses that have successfully addressed and overcome this issue, copied from younger employees, whether they be family or non-family members, are required to start at the “bottom,” performing basic tasks in many and varied areas of the business, so they learn the operations “from the ground up”.  This approach also gives the other employees an opportunity to interact with and become comfortable with the abilities of the young family member employees, while at the same time giving those employees confidence and a strong base of experience for later advancement.  The keys for success on this issue are the consistency and fairness of the approach to family and non-family employee advancement opportunities within the family company.

3.       Competition from Entrance of Multinationals

All companies (other than monopolies) face challenges from competition and in particular, from large multinationals.  In the case of family businesses however, the problem seems more prevalent.  This occurs because family businesses often engage in businesses that have been around for a long time and are, or at least once were, high margin business, catering to the daily needs of mainstream consumers.  These industries and markets are often viewed as attractive targets for consolidation and also for infiltration of larger domestic and international companies.  What defenses does the family business potentially have?  In reality, it is very difficult to compete head-to-head against a much larger, better capitalized company with more developed resources.  Many families have been able to compete effectively though, typically by employing key technology advances, focusing on profitable and sustainable niches, and/or by using their superior knowledge of the local market to deliver a solution that is copied from better received by customers.  Another approach some family businesses have taken in this situation is to acquire other similar companies to gain the mass they need to compete effectively.  Although it’s typically seen as a last resort, some family companies also have ultimately made the decision that the investment, risk assumption and energy expenditure necessary to compete against larger competition was not worth the price, and they have either closed their operations or sold the business.

4.       Poor Communication Between Generations and Branches of Family

The issue of communication exists in every aspect of life and in every business, of course.  Effective communication is critical to the success of any relationship, most any undertaking, and certainly any company.  The challenge in family businesses is that what in a non-personal, non-familial setting may be straightforward and simple, given the frequently charged emotional setting of the family company, becomes a monumental task.  In order to overcome this obstacle, it is important to put into place a series of simple, but regular and non-negotiable, communication protocols and procedures.  An example is to have a regularly scheduled family meeting that all family members working in the business must attend to discuss:  the performance of the business, the strategies for future success, expectations of dividends, as well as any other issues about which family members may copied from have a concern.  Open, honest communication must be encouraged and rewarded – the attendees must see this venue as a safe place to put sometimes sensitive issues on the table for discussion.  For the extra-sensitive issues that cannot be aired in a setting with a relatively large number of attendees, senior generation members of the family must encourage successor generation members to bring any and all issues to light.  This may take the form of one-on-one or small group meetings and it may also include an advisor, where appropriate, to keep the discussions productive and on track.  Poor communication and festering issues between generations and branches are like a cancer in the family business and they must be dealt with directly and conclusively.  History has proven that this issue of poor or non-existent communication is one that can take a family business down more quickly and more dramatically than any other.

5.       No Plan for Exit, or if not Exit, Effective Succession

Not many of us like to face our own mortality.  With entrepreneurs, even more so.  We’re also typically not too keen on admitting or believing that there are others who could do what we do, perhaps even better.  Family businesses are no exception – it is often the case that the founder(s) of the company, the so called “senior or founder generation” will come into the office well into their seventies and sometimes even their eighties!  If this is what they want to do, more power to them; they have undoubtedly earned this right for all the blood, sweat and tears they have put into building the company over the years.  Their desire to be there is not the issue.  The challenges arise when the founder(s) doesn’t, as he or she approaches retirement, properly train, groom and delegate key responsibilities to successor generation members and non-family managers.  There are far too many instances in the history books of senior generation members who did not properly prepare their successors and then met some unfortunate death or injury that left them incapacitated.  It is certainly not pleasant to think ahead on this matter, but it is essential for the founder who wants to be an effective steward of what they’ve built and ensure that their company will continue on many years after them.  While it is not a simple task, there are some relatively straightforward planning steps that can be taken to ensure that one’s company does not fall victim to inevitable, but unpredictable events.

6.       Lack of Interest in Business by Successor Generation

This issue is a double-edged sword.  On the one hand, most senior/founder generation family business owners would like to see their progeny take part in and eventually assume leadership of the business.  On the other hand, having family in the business raises many of the issues mentioned elsewhere herein.  The reality is that if the younger generation is not interested in working in the family business, it is of little use for the senior generation to push or force the issue.  The prudent approach is to bring in professional, non-family executives and allow the younger generation to pursue their dreams elsewhere.   With this approach, they may come back to the business later, but only after having explored the work world and likely having picked up useful skills and experience that can be deployed in the family business.  If they do not come back to the family business, at least the senior generation can take comfort in the fact that they will not have jeopardized their personal relationship with their children in an attempt to force them into the family business setting.

7.       Lack of Understanding and Documentation of Corporate Governance

Like most entrepreneurial ventures, most family businesses begin with relatively little structure and formality, surviving and growing based on the iron will and ingenuity of their founders.  But like most other ventures, family businesses often struggle to professionalize and formalize as they grow.  Eventually, the business becomes complex enough that “shooting from the hip” becomes increasingly risky, as the dynamic nature of the enterprise makes running it without structure like trying to hit a constantly and rapidly moving target from great distance.  What is required at that stage is a least a modicum of formalized governance of the enterprise, or so called corporate governance.  In the family business, the biggest change at this point is that while there is still a CEO (usually the founder) who makes all final decisions, there is also an active Board of Directors, a Family Ownership Group, and a professional management team that helps ensure that the CEO has the correct information to make informed decisions.  This “correct” information includes the Family Mission Statement, which as noted above, should be the guiding light consistent with which all strategic and tactical plans are formulated.  Further, in a corporate governance setting that is working correctly, there must be an awareness on the part of all family and non-family Board members and executives that they have a fiduciary duty to the family shareholders to optimize their return consistent with their wishes.  We use the term optimize here, instead of maximize, as the equation is not one of simple maximization of a single variable, but rather maximization of returns,  consistent with a well-defined site of criteria documented in the Family Mission Statement.

8.       Lack of Formal Budgeting and Planning Process

The lack of formal budgeting and planning goes hand-in-hand with the lack of good corporate governance and it occurs for many of the same reasons.  Given the strong business acumen of the senior/founder generation, it is likely the case that for a good portion of the life of the family business, there was no real or perceived need for formalized budgeting or planning.  The founder(s) were able to keep most everything in their heads and given their exceptional abilities to grow the top line revenues of the business, any budgeting or planning deficiencies never really came to light.  The challenge arises as the organization gets larger and there are more people involved in both revenue generation and expense control.  At that point, it is absolutely critical that the company budget both revenues and expenses, realizing that such an exercise will never produce exact estimates.  It will, however, provide a baseline for comparison of actual revenues and expenses to those budgeted, facilitating the process of ongoing marketing and expense management and “course correction”.  The same can be said for the formulation of a strategic plan:  while it is not likely to ever be perfect, it allows the organization to explore options and develop a baseline or benchmark for the results achieved.  It also permits the development of a more detailed series of tactical plans that can be tied back to the budget, allowing more timely and reliable correlation of results to activity and investment.

9.       Lack of Board and Management Outsider (non-family) Representation

Most successful entrepreneurs become successful based on their belief in themselves and their ideas.  As a group, entrepreneurs, including those who found and grow family businesses, are not known for relying heavily on the ideas or input of others.  For this reason, it is not a trivial decision by vustudents.ning for a business owner, particular in a family business setting, to allow outsiders to provide input on their business.  The Boards of most family businesses are comprised of family members exclusively, or, if there are outsiders on the Board, they typically do not raise much resistance to the ideas of the owners/founders – they are often referred to as “rubber stamp” Boards.  Similarly, founders of family business are often reluctant to bring non-family members to key executive positions within the company.  In both cases though, the family business owner may be committing an important error, depriving his or her company of much needed objective advice from outsiders with critical knowledge and experience.  Those family business owners who address this issue best are those who bear in mind that regardless of outside input, barring extenuating financial circumstances, they will always have the final say and should not feel threatened by the input of non-family members.  The best also seek Board members and executives that are the most qualified they can find, rather than those who will simply say yes to the whims of the owner(s).  They seek those that are willing to ask the tough questions and confront the tough issues.

10.   Lack of Access to Debt and Equity Capital for Growth

The credit markets have tightened up significantly in recent years, making access to much needed growth and working capital harder to come by.  This has forced family business owners to look further than traditional asset-based debt lenders to the non-traditional markets, such as private equity.  This world is foreign to them, as the typical, “we’ll lend you x dollars at x percent interest with these assets as collateral” is the not the way of the non-traditional financing markets.  They may say, “we’ll lend you x dollars at x percent interest, based on projected cash flows, with an option to purchase x percent of equity in your company over this period of time”, or “we’ll provide you x dollars in exchange for a 40 percent equity position in your company, with an option to purchase a controlling position at some future date”.  This is a very different world for the family business owner to navigate, with numerous implications for the future liquidity and ownership of the company.  Given the numerous permutations of possible financial transactions with alternative financing sources, any family business contemplating such an approach would be wise to have a CFO with expensive experience or this area, and/or hire knowledgeable advisors to help them navigate the numerous pitfalls.  This will allow them to remove at least a portion of the risk of such an alternative financing transaction.


Every business organization has a unique set of challenges and problems. The family business is no different. Many of these problems exist in corporate business environments, but can be exaggerated in a family business.
10 challanges of family business are:
1. Lack of Family Mission Statement
2. Lack of Well Trained and Qualified Future Leaders
3. Poor Communication 
4. poor planning 
5. Lack of Formal Budgeting
6. Compensation problems for family members.
7. training
8. investment problems 
9. lack of stretegic management. 
10. overly conservative

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Disadvantages to the individual

You can feel trapped. Might prevent you doing what you really want
Need to be better than non-family peers
The weight of family, peer and employee responsibility
Can be difficult to raise liquidity
Can tear the family apart, if not properly managed.

Disadvantages to the business

Family businesses can be regarded as amateurish
Non-family members may not join because they cannot reach the top
It can be difficult to raise capital
Senior family members may see themselves as having a job for life
Decisions may be too emotional
There may be a deep seated aversion to change
It can be a struggle to continue the spirit of entrepreneurial flair.

The interests of a family member may not be aligned with the interest of the business. For example, if a family member wants to be president but is not as competent as a non-family member, the personal interest of the family member and the well being of the business may be in conflict.

Or, the interests of the entire family may not be balanced with the interests of their business. For example, if a family needs its business to distribute funds for living expenses and retirement but the business requires those to stay competitive, the interests of the entire family and the business are not aligned.

Finally, the interest of one family member may not be aligned with another family member. For example, a family member who is an owner may want to sell the business to maximize their return, but a family member who is an owner and also a manager may want to keep the company because it represents their career and they want their children to have the opportunity to work in the company.


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